All Commentary
Saturday, November 1, 1980

Supply Side Economics: Miracle Cure or More of the Same?

Mr. anderson is Executive Secretary of The Foundation for Economic Education, inc.

After two generations of government manipulation of business structured on the dogma of demand economics, it appears that the death knell is finally sounding for the Keynesian Revolution. The claim that “we are all Keynesians now,” made just a decade ago, has become an embarrassment to the government economists. In its place today is heard the rhetoric of reindustrialization and supply side economics.

Whether such changes bode good or ill is far from certain. Like all labeling of economic ideas, supply side economics and reindustrialization mean different things to different people. To government economists the terms have become just another game in semantics, as old statist programs continue to be advanced under this new rhetoric. To proponents of the free market, however, the labels of supply side economics and reindustrialization mean policies that would reduce the burden of government. Now more than ever, therefore, the proposals behind these new banners must be closely scrutinized.

Few economists any longer challenge the charge that past Keynesian policies have taken an awesome toll on the prosperity and freedom of the American people. Government intervention, in pursuit of the Keynesian Remedy, has generated immense deficit expenditures and a massive increase in the money supply in an attempt to absorb those deficits. The Keynesian doctrines have created the omnipotent state.

A mere repudiation of Keynesian economic policies is no longer enough today. What is also required is the dismantling of the omnipresent state that these policies helped to create. But the frightening question is whether this historical problem of our age, a growth in the magnitude of government, has yet been recognized.

Will the new rhetoric of supply side economics and reindustrialization, as viewed by free market economists, lead to less government and away from disaster? Or, failing to recognize the basic problem of overextended government, will supply side economics merely mean a change in the direction and structure of government intervention by the statist planners now in charge? This is the great issue that looms ahead.

What proponents of the free market know is that there is only good economics and bad economics. The danger of segmenting economics into categories such as supply side, de mand side, labor, urban, welfare and the like is that it can, and often has, led to special interest politics that do harm to the general welfare of society.

Production for Use

That profound observation by Adam Smith that, “the sole end of productive activity is consumption,” needs to be constantly recalled. The market process has demonstrated its superiority in bringing forth more of the world’s goods whenever it has been free to do so. Freely acting traders are motivated to produce more because they can then consume more, recognizing that a greater supply provides them with greater demand. For both the individual and nation, supply creates its own demand since in the aggregate they are one and the same.

When government meddles with production or consumption it frustrates the ultimate purpose of all economic activity—the efficient satisfaction of human wants. Too often the end sought by government programs becomes production itself or the creation of jobs. The result is nothing more than modern “pyramid building” or formulation of meaningless employment. The wasteful consumption of productive resources in such endeavors therefore denies these resources to the satisfaction of human wants.

Especially alarming in this respect are many of the proposals being offered by political economists. Calls for all manner of new government subsidies and government directed enterprises are being heard. Vast new government spending projects are urged as the panacea for the decline in productive activity.

Stubbornly retaining their bias for government manipulation of the economy, many of these economists are promoting policies of interventionism under the new banner of supply side economics. Under their direction, the potential of supply side economics becoming nothing more than an additional rationalization for expanding government is a very real threat. Such action would miss entirely the real issue of over-ex-tended government.

This dangerous idea of turning to government to do something still has a powerful appeal among many economists. Proponents of this brand of supply side economics and reindustrialization seem convinced that all that is required is a simple change of places at the “public trough.”

The tragedy, of course, is that further manipulation of the economy pyramided on top of the present structure of government means certain disaster. A shift in the direction or nature of government intervention in no way addresses the basic problem, but can only worsen it by making government an even greater force in society. What is required in stead is an abandonment of the massive governmental structure that is plundering and depriving the citizen of his productive efforts.

Regulated Decline

It would seem that after two generations of government manipulation of economic affairs, the lesson of an expanding government stifling individual freedom would be well learned. The Keynesian interventionist policies of the past have inflicted the very worst of consequences upon this nation. The Keynesian Remedy has transformed this nation from a society of free and prosperous people into a regulated society suffering from economic decline.

And the primary legacy of this failure of Keynesian economics has been the growth of the omnipotent state. After many years of government policies rewarding leisure and consumption, assaulting productive capital and taxing work effort, the magnitude of government has finally reached oppressive proportions. The result is a declining standard of living for Americans and a mood of pessimism regarding their future.

A different program of supply side economics, led by free market proponents, could be the path to freedom. Policies under the banner of “supply side economics” that reduce taxation on productive capital and work effort, that eliminate interferences and regulations among individual traders, that curtail political harassment in the marketplace, and abolish the vast transfer of wealth through the political process would drastically shrink the magnitude of government.

If “supply side economics” is perceived as this kind of alternative intellectual force, then the advancement of individual initiative as a replacement for government dominance in economic affairs and the prospects for a dynamic reindustrialization and future prosperity are great. Rather than adding just another layer of statist tinkering on the economy for different reasons, the potential for reducing government’s role in society through supply side economic policies holds much promise.

What must be recognized and fully understood about the present state of affairs is that America’s problems have reached crisis proportions because of the magnitude of government itself. It is not only what government has done but also how much government has done that lies at the source of this nation’s ills.

A program of “supply side economics” that leads to a reduction in the size of government and a return to economic freedom is the great hope and promise for a prosperous future. Supply side economics channeled in such a direction can be the path back to freedom. If supply-side ideas that lead to a reduction in government are chosen, then we will have found our miracle cure. Otherwise, only a change in the direction of socialism in America will be the result.

It is too early to know which kind of “supply side economics” will prevail, but the hope of the future rests on choosing the right path. For it will ultimately determine whether we will be free individuals or servants to an omnipotent state.

  • Robert G. Anderson taught economics and business management at Grove City College, Pennsylvania, and served as Executive Secretary of the Foundation for Economic Education in the 1970s.